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Chapter 24: Q. 7 (page 655)

In what way is a permanent negative supply shock worse than a temporary negative supply shock?

Short Answer

Expert verified

The temporary negative supply shock is worse than the permanent negative supply shock.

Step by step solution

01

Step 1. Introduction

Inflation is defined as a steady increase in the prices of goods and services within an economy over a set period of time.

02

Step 2. Explanation

Due to the constant negative supply shock, inflation and output in the economy tend to fluctuate, with the former increasing and the latter decreasing. Inflation will rise and output will fall as a result of the transitory negative supply shock. Because the long-term effect of a permanent negative supply shock on inflation and output is permanent, the economy returns to long-run equilibrium with the help of self-correcting mechanisms. As a result, both inflation and output return to where they were previously.

03

Step 3. Conclusion

Hence, the temporary negative supply shock is worse than the permanent negative supply shock.

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Most popular questions from this chapter

Assume that aggregate output is below the natural rate level. What would an activist policy recommend that the government do? Explain your answer.

鈥淚f autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation.鈥� Is this statement true, false, or uncertain? Explain your answer

During the global financial crisis, how was the Fed able to help offset the sharp increase in financial frictions without the option of lowering interest rates further? Did the Fed鈥檚 plan work?

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the units setting to 鈥淧ercent Change From Year Ago.鈥� For the unemployment rate, adjust the frequency setting to 鈥淨uarterly.鈥� Select the data from 2000through the most current data available, download the data, and plot all three variables on the same graph. Using your graph, identify periods of demand-pull or costpush movements in the inflation rate. Briefly explain your reasoning.

Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound?
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